The August 2002 Senior Loan Officer Opinion Survey on Bank Lending Practices
focused on changes in the supply of and demand for bank loans to businesses and
households over the past three months. In addition, the survey contained three sets of
supplementary questions. The first set addressed banks' exposure to companies that
had released inaccurate or misleading financial information and the banks' responses.
The second set focused on loans to commercial and industrial firms that are secured
by real estate but used for purposes other than the purchase or improvement of that
property. Lastly, the survey asked whether automakers' incentives were having an
effect on demand for automobile loans at banks. Loan officers representing fifty-six
large domestic banks and twenty U.S. branches and agencies of foreign banks
participated in the August survey.

The results indicate some further tightening of standards and terms for loans both to
businesses and to households. The fraction of domestic banks that reported tightening
standards on commercial and industrial (C&I) loans over the past three months slid a
bit more in August, after having declined substantially in April, but the net fractions of
domestic banks that tightened loan terms jumped again in the latest survey.
Significant fractions of branches and agencies of foreign banks also continued to
tighten both standards and terms in August. In addition, somewhat larger net fractions
of domestic and foreign institutions reported weaker demand for C&I loans in August
than had done so in April. Both domestic banks and foreign institutions tightened
standards on commercial real estate loans over the past three months, and they also
reported weaker demand, on net, for these loans.

In the August survey, most banks reported that they had very little exposure to firms
that have been the target of investigations into their accounting practices. Apart from
the already highly publicized cases, a moderate net fraction of banks indicated that
they had seen an increase in the frequency with which firms had submitted
questionable financial statements during the loan approval process over the past year.
In response to the scandals, most banks reported that they had begun requesting
additional financial detail during the approval process, had increased the frequency or
intensity of monitoring, and were enforcing loan covenants more strictly.

According to the domestic respondents, standards for residential mortgage loans were
largely unchanged over the past three months, and the demand for these loans was
stronger on net. As in April, only a modest portion of domestic banks, on net,
reported tightening standards for consumer loans. Demand for consumer loans was
slightly weaker, on net, over the past three months as banks reported that they lost
some business to automobile finance companies.

The percentage of domestic banks that reported having tightened standards on C&I
loans to large and middle-market firms over the past three months edged down to 23
percent from 25 percent in the previous survey, and one bank eased its standards--the
first reported easing since 1999. The percentage tightening standards on business
loans to small firms fell to 9 percent from about 15 percent in April, and two banks
eased standards on these loans.

Conversely, for several of the surveyed terms on loans to large and middle-market
firms, larger fractions of domestic banks reported tightening in August than had done
so in April. The net fraction of domestic banks that had increased costs of credit lines
and raised spreads of loan rates over their cost of funds rose to about 40 percent in
August from about 20 percent in the April survey. Somewhat larger net percentages
of domestic banks also reported that they had tightened loan covenants for these
customers over the past three months than had done so in April. Moreover, almost 50
percent of domestic banks increased premiums charged on riskier loans to large and
middle-market firms, about the same as in the previous two surveys. The net fraction
of domestic banks that increased the costs of credit lines for small firms rose to 22
percent in August from only 8 percent in April. The net fractions of banks that
tightened covenants and increased spreads for small firms also rose somewhat in
August relative to the last survey.

The fraction of U.S. branches and agencies of foreign banks that tightened standards
and terms on C&I loans remained in an elevated range. The fraction of foreign
institutions that had tightened standards for customers seeking C&I loans or credit
lines rose to 60 percent in August from about 40 percent in the April survey. From
April to August, the percentage of foreign institutions that increased spreads of loan
rates over their cost of funds rose from about 60 percent to almost 80 percent, and the
percentage that raised premiums on riskier loans also rose from about 50 percent to 75
percent. The fraction of foreign banks that strengthened loan covenants and increased
the cost of credit lines also increased in August.

More than 80 percent of the banking institutions that tightened standards or terms on
C&I loans over the past three months voiced concerns about the economic outlook, up
from 70 percent in the previous survey. Many banks also cited industry-specific
problems and an increase in corporate bond defaults as very important reasons for
tightening lending policies. The fraction of domestic and foreign respondents that
cited reduced tolerance for risk as a reason for tightening their lending policies also
remained high. About 60 percent of domestic banks and nearly all of the foreign
branches and agencies pointed to concern about further revelations of accounting
inaccuracies as at least a somewhat important reason for tightening.

About 45 percent of domestic banks, on net, reported weaker demand for C&I loans
from large and middle-market firms in August, up from about one-third in April. The
net fraction of banks that reported weaker demand from small firms also rose slightly
in August, to 36 percent. The net percentage of foreign branches and agencies
reporting weaker demand for C&I loans over the past three months increased to more
than one-third in the current survey from about 15 percent in April.

All but one domestic bank that experienced weaker demand reported that a decline in
customers' need for bank loans to finance capital expenditures was at least a
somewhat important reason for the weakness in demand, and more than one-third of
respondents chose this reason as "very important." As in the past several surveys,
substantial fractions of banks also reported weaker demand for loans to finance
mergers and acquisitions, inventories, and accounts receivable. Out of five domestic
banks that reported an increase in demand for C&I loans over the past three months,
four of them indicated that the increase was due to a shift in borrowing from other
credit sources that became less attractive. The most frequently cited reasons for
weaker demand at foreign institutions were a decline in requests for merger and
acquisition financing and reduced customer investment in plant and equipment.

Issues related to corporate accounting practices. A series of special questions were
aimed at banks' experience with, and response to, the most recent revelations of
improper corporate accounting practices. Most domestic banks, and about half of
foreign branches and agencies, reported that less than 1 percent of their outstanding
C&I loans had been made to companies that had materially changed their prior-period
financial statements during the past year or are the subject of investigations relating to
their accounting practices. However, three large domestic banks and one foreign bank
reported that more than 5 percent of their outstanding C&I loans were to such
companies.

A moderate net fraction of domestic and foreign institutions indicated that they have
seen some increase in the number of companies that submitted misleading financial
information during the past year, and a few domestic banks characterized the increase
as notable. In response, the majority of the banking institutions in the survey have
begun requesting additional financial detail and increasing the frequency or intensity
with which they monitor loans. Many banks also reported that loan covenants have
been enforced more strictly and that loan terms had been tightened. Very few
domestic banks resorted to calling loans or refusing credits that would have previously
been approved, but significant fractions of foreign institutions reported taking such
actions.

Banks that had a higher exposure to firms that have been identified as having released
false or misleading financial statements were not significantly more likely to have
instituted remedies (such as requesting additional financial detail) than banks that had
less exposure to those firms. However, banks that indicated that they had seen an
increase in the frequency with which firms submitted questionable financial statements
(apart from the highly publicized incidents) were more likely to have stepped up their
monitoring of loan customers and enforced loan covenants more stringently.

Domestic and foreign institutions reported that regular financial statements received
the highest relative weight when they assessed credit risk. By a wide margin,
domestic banks reported that credit ratings by independent ratings agencies were the
second most important piece of information, on average. In general, domestic banks
attached significantly less weight to market measures such as interest rate spreads on
company debt and equity prices than did foreign banks. About two-thirds of the
domestic and foreign banks surveyed reported that they typically verified that their
material business customers were in compliance with the terms and conditions
specified in their loan contracts on a quarterly basis, and about one-fourth did so
monthly.

Commercial real estate lending. The net fraction of domestic banks that reported
tighter standards on commercial real estate loans over the past three months declined
further in August, to 25 percent. At branches and agencies of foreign banks, the net
percentage reporting tighter standards on such loans increased slightly, to about 30
percent. In the current survey, more than 30 percent of domestic respondents and 20
percent of foreign institutions, on net, noted that demand for commercial real estate
loans had weakened, about the same fractions as in April.

A set of special questions addressed banks' exposure to loans that were secured by
real estate, and thus reported as commercial real estate lending but in fact were used
for commercial and industrial purposes. Most foreign institutions and almost 50
percent of domestic banks reported that less than 10 percent of their commercial real
estate loans fit this description. About one-fourth of domestic banks reported that 20
percent or more of their commercial real estate loans were used for purposes other
than the acquisition or improvement of real estate. However, only a small net fraction
of domestic respondents reported that such lending had increased over the past year.

Lending to Households(Table 1, questions 15-23)

Only three domestic banks reported that they had tightened lending standards on
residential mortgage loans, while one bank reported that it had eased them. On net,
about 27 percent of domestic respondents reported increased demand for residential
mortgages, up from 6 percent in the previous survey. However, the level of mortgage
refinancing has recently been elevated, and the responses to this question are highly
correlated with such activity despite our instructions to include only demand for the
purchase of new or existing homes.

In the current survey, about 15 percent of domestic banks indicated that they had
tightened standards on credit card loans over the past three months, a somewhat larger
percentage than in April. Terms and conditions on credit card accounts were largely
unchanged for the second consecutive survey. For other types of consumer loans, less
than 10 percent of banks, on net, reported that they had tightened standards over the
past three months, down from one-fifth of banks in the April survey. In addition,
about 15 percent of domestic banks raised the minimum required credit score and
reduced the number of exceptions granted to customers not meeting credit-scoring
thresholds on these loans.

On net, domestic banks reported that demand for consumer loans was somewhat
weaker over the past three months, perhaps in part because the incentives offered by
major automobile manufacturers and their captive finance companies siphoned
business away from these banks. Indeed, a substantial net fraction of banks reported
that demand for auto loans had decreased somewhat since the automakers began their
latest round of incentives.